As Rich wrote on Wednesday, this is historically a weak period for equity markets through the end of October, and right on cue the markets are correcting. Of course, this is happening right after excessive optimism once again gripped the market. Sentiment was abysmal in October of 2022 and close to euphoria in July of 2023. This correction, consolidation, is healthy, normal, and likely to take a few months to play out.
Besides sentiment, there were other warning signs building throughout the month of July and longer. Our inter-market studies have focused on US interest rates and the US Dollar as they have been critical in understanding equity movements this cycle. The first chart below is the $USD and you can see a strong move lower in the dollar from September of 2022 until July of 2023 and, no surprise to us, equities moved higher. But in July, strength re-entered the dollar market and we are on the verge of it crossing back above its 200-day moving average (blue line in the chart). The second chart is the 10-year treasury yield. As of yesterday, yields have moved to a level last seen in 2007! For months and months, equity markets ignored the rise in yields, but it seems as though they may have reached an uncomfortable level for equities, and specifically overvalued equities. Higher yields AND higher $USD are not a good combination. We will be watching these markets closely over the next few months.
Source: Stockcharts.com as of 8/17/2023
But for now, we still believe this correction to be noise in what is a longer equity trend higher. It is not perfect but a simple way to determine trend is the 200-day moving average. The S&P 500 is above its 200-day moving average and the 200-day is sloped higher. The trend is your friend, and the trend is higher. Therefore, we are looking for buying opportunities during this correction.
The chart below also demonstrates important buy and exit points using the 200-day moving average. When the S&P 500 was below the 200 day, it acted as exit points for investors (the red boxes) through 2022, and when the S&P 500 was above the 200 day it acted as buy points for investors (the blue box) in March of 2023. Will this correction take price back to the 200-day before resuming higher? I have no idea, but it would seem very logical. It could also line up with the important 4200 level we wrote about at the beginning of the year. That would be a great buying opportunity if we ever get there.
Source: Stockcharts.com as of 8/17/2023
Sean Dillon, CMT, CFTe
SVP, Investment Strategy
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